Into the brave new world

News concerning the health of the US and European economies see-saws daily, but for many companies, the message is clear. Emerging markets is where the growth is. Increasingly, Australia’s smaller businesses are braving the odds and pushing for expansion into emerging markets, where well-resourced, large cap companies are usually more successful.

Businesses are looking further for new markets or to broaden their domestic manufacturing capabilities to take advantage of the strong Australian dollar.

However, unfamiliar regulations and banking laws, foreign languages and little local knowledge mean companies need agents or third party help from government bodies such as Austrade.

The biggest difference between large and small companies, according to HSBC Head of Trade and Supply Chains Andrew Skinner, is the “beachhead" effect.

“Larger companies tend to have the financial resources to set up their own sourcing office, treasury office or sales office in the emerging market because they will be taking a longer term view, have money available to set it up and can bide their time."

Skinner says there has been increasing interest in the Bangladeshi, Vietnamese and Indian markets as companies move towards the “China plus one" strategy where they look beyond China to locate their operations.

“We’re seeing regional sites being set up for manufacturing; well publicised listed clients are setting up in Singapore or Vietnam saying they will run their expansion from there. But it has certainly been escalated in the past 12 months because of the stronger Australian currency."

Food security in emerging markets means agri-businesses in particular are doing well, he says, as are contracting and engineering companies servicing Asia’s growing demand for ports, roads and general infrastructure.

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Company Profile

Austin Engineering
is maximising its exposure to the global mining boom by setting up workshops where its clients operate – Colombia, Chile, Peru, Indonesia and Oman.

Some of its operations are in start-up mode and Shaw Stockbroking expects them to deliver significant earnings growth . But less activity in its Middle East joint venture and delays in completing its Chile workshop dented its fiscal 2011 net profit.

“For Austin, establishing an emerging market base is a little easier because they are right in their market – they know what their market wants and can act quickly," Naos Asset Management managing director Sebastian Evans says.

He points to healthcare start-up
Sirtex Medical
which has global operations but is promoting its liver cancer treatment – a “microsphere" that delivers targeted internal irradiation to cancer cells – in Asia.

Clover Corp
is in position to generate earnings from emerging markets where its Nu-Mega omega-3 nutritional supplement is used in infant formula.

Microequities chief investment officer Carlo Gill says Clover Corp’s strategy is “very much the exception", having purposely targeted the emerging markets because Latin America and the Asia Pacific are the fastest growing regions for its product.

However, vitamins manufacturer
Blackmores
and mining services software company
QMastor
have also made a concerted move into emerging markets, as has national security documentation and procedures business
Nexbis
, which has a Malaysian focus.

“Clover Corp is a bit different. It does 80 per cent of its business in Asia, and China now accounts for 10 per cent of revenue and is by far their fastest growing market," Gill says, but he is not seeing a large-scale push offshore by smaller companies yet.

Strategies such as electronic technology company
Altium
’s decision to move its headquarters and senior staff to China are “almost unheard of" among smaller companies.

Altium generates between 12 per cent and 15 per cent of its sales in China and sees far greater potential in the Chinese market, Gill says.

Also, they are predominantly selling to Chinese government entities which, he says, gives them “better protection" in terms of software copyright issues.

“But I’ve never seen a company that said ‘We’re going to shift lock, stock and barrel to China’.

“To convince your senior executive team to relocate is quite a big leap in terms of cultural and geographic shiftThey also don’t have a Chinese investor base and China is not their biggest market, so it was kind of from left field," he says.

“Part of the reason small and micro-cap companies aren’t pushing as aggressively as some of the larger players is the different growth dynamics," says Gill.

Small-cap companies do not need to take the extra risk of entering an emerging market because they are in a strong growth dynamic locally and have not reached saturation point domestically, which is often part of the reason large-cap companies venture offshore, Gill says.